Megadeals signed at the height of the market which have not closed are facing the prospect of being pulled, as investment banks search for ways to decrease their exposure to the leveraged loan market.
Equity traders have taken a bearish attitude to stocks where leveraged buyouts have not closed such as the Clear Channel Communications deal, where the media company’s stock was trading below the offer price by nearly 25 percent at $30.13 per share (€20.52 per share) at yesterday’s close.
The level of unsyndicated debt in the leveraged loan markets remains at around $200 billion, according to data provider Dealogic.
Banks with balance sheet commitments to long positions in deals, such as Bain Capital Partners and Thomas H Lee Partners’ $27.5 billion media buyout, will be attempting to extricate themselves from deals impossible to syndicate in liquidity-starved debt markets, according to Harvey Hoogakker, a director in German bank West LB’s financial sponsor group.
“Those in this position will be looking at the loan documentation and MAC [material adverse change] clauses which allow banks to walk away from a deal. To the extent that banks have the right to no longer satisfy their obligations under that commitment and are looking to close now and you have a situation where the deal isn’t funded, they will walk away.”
Hoogakker said this assessment would be made on a case by case basis. “In the first instance there will be an attempt to restructure the deal, revisiting the leverage and pricing while working with the sponsor to agree a deal acceptable to the markets.” Hoogakker said that such negotiations had gone on at West LB since the credit crunch, although the scale of the renegotiation was different due to the bank’s mid-market focus.
Issues include the levels of leverage, pricing and the aggressive structures of debt financial sponsors were able to demand nine months ago. “Covenant lite and loose transactions or structures allowing cash leakage through dividend payments are no longer feasible. [These structures were possible to syndicate] nine months ago but these deals cannot be sold into the markets on those terms and conditions.”
It is possible the signal such cancellations send out will have a negative effect on market sentiment, Hoogakker said. He also said they may effect the so-called private equity put on companies where the share price has risen due to speculation it is a takeover target. But he said much of this added value had disappeared in large cap stocks which are the target of mega buyouts due to the decreased likelihood of such deals happening for the foreseeable future.
Compromise efforts have had to be pushed through recently, including BC Partners’ $16.5 billion Intelsat deal, which completed after the European buyout firm persuaded the company’s original creditors to come into the financing of the deal.